Clans or Companies? The Legal Gap in our Digital Economy...

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Amidst the digital boom currently witnessed by the Kingdom of Saudi Arabia, a new economy is beginning to take form, pioneered by young persons in their twenties and thirties of age, using only keyboards and headsets as their tools. This is what can be termed as the economy of “clans”, which are hybrid entities which are not just limited to being mere “sports teams” competing in electronic games tournaments but have rather developed into fully-integrated digital content studios, striving to attract fan bases numbering in the millions on platforms such as YouTube and Twitch.

The Saudi Esports Federation is now aware of the significance of this sector, and it has, therefore, enacted regulations governing clubs, teams and players, as well as creating judicial bodies such as the disciplinary committee and the appeal committee. These efforts, emanating from the basic regulations of the Federation, aim to govern the sports aspects of this activity, including players’ registration, regulating transfers, as well as organizing tournaments held under its umbrella.

However, an important question arises in this regard: what about the other side of the picture? How about the economy of the content which now represents the most significant financial lifeline for most of these clans, teams or digital clubs?

Here lies the subtle and decisive gap. The Federation, as per its very nature, is regarded as a counterpart to traditional sports federations, assumes a role, primarily focused on official events and tournaments. However, the real economic value and the most significant legal risks are increasingly concentrated in an area not fully covered by this regulatory umbrella: digital content production and participation in tournaments that fall outside the Federation’s umbrella, or are organized, not under its umbrella, contrary to the regulations of the Federation, but beyond its authority.

The Other Side of the Clan: A Media Company, Not Just a Sports Club

To perceive the challenge, we need to transcend the traditional perspective, that is because a modern clan is actually a two- aspect entity,

1. The Sports Aspect:

This element trains, participates and competes in tournaments, such as the World Esport Cup. This aspect is comparatively organized under the regulations of the Federation or those of continental or regional Federations, regarding tournaments which are organized abroad or outside the Kingdom of Saudi Arabia.

2. The Media Aspect:

This component produces daily content, (live streams, vlogs and entertainment clips) and creates a trademark, and it also has commercial relationships with sponsors whose interests extend beyond winning championships but rather aim to realize “reach” and audience engagement.

This media aspect generates millions of revenue, and accordingly constitutes a source of the most complicated legal disputes.

In this respect, the global arena provides cautionary examples, the most significant of which is the case of “Tfue” Tenny versus FaZe Clan (2019). The dispute is not related to a tournament prize, but it is related to a contract alleged by Tfue to be “oppressive” under which FaZe clan purportedly claimed 80% of the revenues generated from his content and commercial deals, which are not directly related to tournaments.

This case reveals a shocking fact; contracts designed for esports tournaments often fail to adequately regulate the complex relationship between an “influencer” and the entity to which he is a member, particularly with respect to the revenues and the content rights or the trademark rights, and the revenues associated with advertising and marketing for third parties through the influencer’s content; where the influencer or influencers may have the upper hand regarding the reputation of such entity or clan; to the contrary, the influencer may still be a beginner in this digital field, but after interaction with esports professionals or influencers, he might be a star and rise to prominence because of the clan’s audience base and institutional reputation.

Potential Scenarios in Our Domestic Environment

Scenario 1: The Star Influencer

A young Saudi player joins a clan under a basic professional player contract. However, within the period of one year his Twitch channel becomes the most popular in the area, generating monthly income from subscriptions and advertising exceed his salary paid by the clan by tenfold. The player accordingly decides to leave the clan. In this context, key legal questions arise: who owns the rights associated with the channel and the followers? Does the clan have the right to claim a percentage of his future profits under the pretext that the clan has contributed to building the player’s reputation? The existing sports regulations do not provide a clear answer in this regard.

Scenario 2: The Smart Sponsor

An energy drink company may sponsor a clan, not for the purpose of winning competitions but to reach out to its audience. The agreement, concluded in this context, obliges the clan to perform a certain number of streaming hours and promotional clips; nonetheless, the clan fails to achieve the intended goals. Accordingly, a question arises here: is the Federation Disciplinary Committee capable to settle a dispute of commercial – marketing nature? Most probably the case will be brought before the commercial courts, the matter which exposes the limitations of the existing regulatory umbrella.

Limitations of the Current Regulations: Matters Not Covered by the Regulations:

Despite the existence of the Esports Clubs and Teams Licensing Regulation, and the Regulation of Professionalism, issued by the Federation, they are deemed to be primarily designed to deal with sports issues; for instance, Article (4) of the Regulation of professionalism deals with the professional contract organizing, the relation between the club and the player as an athlete, but it does not adequately address the matter of the digital content intellectual property rights, or the percentages for sharing revenues realized from streaming platforms and advertising and sponsorship after being terminated, or beyond the scope of the Federation’s championships, or even the influencer’s obligations.

Moreover, the disciplinary and appeal committees are concerned with violations occurring during competitions (such as cheating or non-sports conduct) or violating the regulations of the Federation, because they do not have the competence to settle a dispute related to copyrights on YouTube, or a dispute related to commercial sponsorship agreement.

The main concern is that the clan, in its capacity as an entity practicing commercial and media activities, and is subject to multiple legal systems, including the Companies law (if the clan is registered as a company), the labour law (in connection with the employment contracts), and the copyright protection law, and commercial transactions law.

This regulatory fragmentation leads to a state of legal uncertainty.

Solution: Building Regulatory Bridges to Close the Gap

The challenge does not mean to dismantle the existing regulatory framework, but rather to seek building on and expanding it to cover the digital economy in its entirety.

1. To Update the Existing Regulations

The Saudi Esports Federation shall initiate updating its regulations (more particularly the regulations of professionalism) so as to include detailed chapters on “content creating”, and shall contain express provisions regarding the ownership of digital channels, the distribution of revenues derived from streaming and advertising, as well as the players right upon the termination of his contract.

2. To Establish a Unified Economic Track

There shall be strategic collaboration between the Ministry of Sports, the Ministry of Commerce and the Saudi Authority for Intellectual Property and the Audio-Visual Media Commission to develop a unified registration track for the entities operating in the field of gaming economy. This will ensure that any entity, upon formation, is complying with all the relevant regulations, not only the sports regulations.

3. To Develop Sport Judiciary

to provide training for judges and referees, engaged with the Committees of the federation, on commercial and advertising aspects, or otherwise establish Intellectual Property and Entertainment Court (IPEC) in collaboration with the Ministry of Justice similar to the court in California State which adjudicated the case of Tfue versus FaZe, or to establish a specialized chamber for considering the disputes of digital content, within the judicial structure of the federation to serve as a fast and specialized body for the settlement of complex disputes in this sector.

Conclusion: From Regulating sports to Empowering Economy

Recognizing clans as sporting entities is deemed a necessary primary step; however, for the kingdom, to achieve full leadership in this multi-billion-dollar sector, it shall take the second step, namely to recognize clans as integrated economic and media entities, and to build regulatory bridges that protect all the parties thereof, from the youngest player to the biggest investor. Indeed, ignoring the content economy implies ignoring the future, and according to the Crown Prince: “we have capabilities to be doubled as to their impact, and to increase their contribution to making the future” and the future does not wait for no one.